From Texas, I mostly cover the energy industry and the tycoons who control it. I joined Forbes in 1999 and moved from New York to Houston in 2004. The subjects of my Forbes cover stories have included T. Boone Pickens, Harold Hamm, Aubrey McClendon, Michael Dell, Ross Perot, Exxon, Chevron, Saudi Aramco and more. Follow me on twitter @chrishelman.

Hedge Fund Keeps Hammering Hess After Lackluster Russian Sale

The iconic Hess trucks are fun, but not a core business. (Photo credit: JMazzolaa)

Embattled oil company Hess Corp. appears to have left money on the table in its deal, announced last week, to sell its scandal-tainted Russian subsidiary to Lukoil for $2.05 billion.

As the Wall Street Journal reported this week, Hess received a higher $2.35 billion bid for the assets from a company called NK Dulisma. According to the report, NK Dulisma upped its previous $2 billion bid for the assets on April 1, before the deal with Lukoil was announced.

Maybe Hess just wanted out of Russia as quickly and smoothly as possible — figuring that giant Lukoil could close on a deal faster than unknown NK Dulisma. As my Forbes colleague Richard Behar wrote in this expose last June, Hess has been allegedly doing business with the Russian mob. A day after Forbes first reported the Hess mafia link, an executive at its Russian subsidiary allegedly tied to the mob was fired.

In Russia money certainly isn’t the sole determining factor in forging deals, still $300 million is a lot. If Hess really did pass up on a bigger payday it will just give more ammunition to Elliott Management, which has been attacking Hess in recent months for years of underperformance under CEO John Hess.

Elliott, a hedge fund operated by billionaire Paul Singer, owns 15.5 million shares of Hess roughly 4.5% of its capitalization, worth more than $1 billion.

Elliott has criticized John Hess for his 17 years of ineffective management, presiding over what it considers a scattershot approach to investment. According to Elliott, the company has spread itself too thin, leading to subpar allocation of capital and culminating in the deep underperformance of Hess Corp. shares relative to its peers. Over the past five years Hess shares have trailed those of its peer group by more than 30%.

Elliott has proposed breaking up Hess into two companies — one focused on U.S. assets, the other on international. The hedge fund managers also believe that Hess could also unlock tremendous value by selling its excellent position in the Bakken play of North Dakota. A likely buyer would be Chevron, which missed out entirely on the Bakken land grab of recent years. Elliott has nominated five new boardmembers and is gearing up for a proxy fight at Hess’s annual meeting May 15. The hedge fund has created the website www.reassesshess.com to present its case.

On the defensive, Hess has made some moves in recent weeks to unlock value. These include the Russian sale and the sale of assets in Azerbaijan. Hess has also announced plans to divest its operations in Indonesia and Thailand plus its U.S. filling station, marketing and trading businesses. Hess says it also intends to sell its pipeline assets in the Bakken play. Topping it off: an increase in the dividend by 150% to $1 per share, $4 billion in share repurchases. In time, says Hess, the company aims to discard all of its “downstream” assets and become a pure play company focused on exploration and production. In its most recent presentation to shareholders, the company has dismissed out of hand Elliott’s idea of splitting the company in two. Hess has named its own slate of new boardmembers to stand for election at the annual meeting.

Far from praising John Hess’s recent moves as evidence of him seeing the light, Elliott, in a new letter to Hess shareholders this morning, dismisses the recent moves that John Hess has announced to restructure the company as too little too late.

John Hess has never been able to articulate a plausible strategy for Hess. In his own words: “We are different than the other independents. We are the most global…We have the portfolio of a major, we have the technical challenges of a major…” In meetings with Shareholders, John Hess continues with grandiose statements in which he declares Hess to be “a global franchise of operating capabilities.”

Hess is not a major. It is 1/23rd the size of Exxon and 1/12th the size of Chevron. Yet, Management persists in running the Company as though it were. The result is a distracted organization that is subscale in nearly every basin in which it competes. Hess should not aspire to be one of the world’s largest companies. Rather, Hess should commit to and follow through on delivering top quartile returns for its Shareholders. Hess needs to be run for the 90% of Shareholders who own Hess stock for economic returns, rather than for the 10% Shareholder who wants to head a global dynasty.

Elliott’s antagonism certainly has not been all bad for John Hess, however. Hess and his family (the descendants of Leon Hess, who founded the company in 1933 at age 19) control 36.4 million Hess shares, 10.6% of the float. A little less than half of those shares are held in charitable trust or in the Hess Foundation. Last December, before this fight with Elliott got under way, Hess shares traded at $50. Today they’re near a 52-week high at $73. That’s pushed the Hess family holding up from $1.8 billion to $2.7 billion in just a few months.

With that kind of uptick, maybe John Hess ought to send Paul Singer and Elliott Management a thank you note.

There’s a lot more to come in this battle of the billionaires ahead of the May 15 proxy vote. Stay tuned.

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